Business is Personal (Finance)

Tour group vacations

2010-03-09T16:37:00Z

For our vacation to Hainan last week, our local travel agent booked us on a tour group package. Following a tour group has some advantages and disadvantages. The good: cheap transportation and lodging with no need to make decisions on where to go. The bad: trips are not exactly relaxing as you are on a break-neck schedule to see all the sights. The ugly: the food stinks beyond belief.

For transportation and lodging, our tour package was a pretty good deal. We paid 5000rmb total for 2 adults, 1 kid and 1 baby. Before signing up for the tour, I looked at booking the details ourselves:

Roundtrip plane tickets from Guangzhou to Hainan: 1000rmb adult, 800rmb child, 200rmb baby = 3000rmb
Roundtrip bus fare from Taishan to Guangzhou: 150rmb/seat = 450rmb
Lodgings: 3 nights at 500rmb/night = 1500rmb
Transportation on Hainan: 300rmb/day for taxis & buses to go from site to site = 900rmb

To reproduce this same travel path, it's roughly 1000rmb cheaper to follow a tour group than doing-it-yourself.

Our package did not include admission fees into any of the sights on the schedule. While on the bus headed to our first destination, our tour guide said costs not covered by our package was 380rmb per adult (children free) for all three days -- and he was upfront about saying the bit extra we paid here was how he earned his salary. This brought our unofficial package costs up to 5760rmb.

While on vacation, we probably spent another 250rmb per day on food, drinks and souvenirs. Obviously, the costs are much higher in tourist traps. Everywhere you walk, somebody is offering to take a picture of you for 10rmb. Hold a sea turtle for 10rmb. Hold a tiger cub for 30rmb. Wear native costume jewelry for 10rmb. Food & drink for 3X the price. We tried our best to avoid the majority of tourist spending but sometimes you have no choice when you've walked all day and are thirsty. Or you want to try the native foods and drinks that you know you can't get back home.

As a side note, Hainan is a very prosperous island. City streets are wide and clean, many buildings are either new or freshly painted, new houses are everywhere in the countryside with gleaming stainless steel doors, 4-star and 5-star resort/spa hotels, high speed rail construction to span the entire island. All from tourist money since the only other industry in Hainan is agricultural (peppers, coconuts, mangos, durian and other tropical fruits). If you want to retire in China but you still want all the creature comforts of the developed world, Hainan is a good bet. Housing is more expensive than Taishan at 6000rmb/sq meter but that means you would accept smaller living quarters in exchange for a Hawaii-like lifestyle.

In total, our Hainan vacation was about 6500rmb or just a bit less than $1000 USD. Next time though, we will rent a minivan and drive there. Even though it's a 6 hour drive (plus 1 hour ferry ride), it's not that much longer than a plane trip when you factor in the 2.5 hour drive to Guangzhou Bayou Airport and the typical airport wait. That will greatly reduce the travel costs but inversely increase the lodging costs as we'll want to stay in a nice place with pool, hottub, spa within walking distance to a local town for dining and shopping.

The biggest advantage though for driving is we'll actually be able to relax on vacation. Our tour group visited 8 different places -- and at each site, we had to drag 2 kids along. Luckily, we brought our stroller with us (we can push both kids along if the 2-year old sits on the 4-year old's lap) so that helped a little. But there was still a lot of walking at each location trying to see and photograph everything. By the last day, we spent a lot time sitting around waiting for the tour bus to leave for the next stop. And after returning home, we spent 2 days recuperating from the vacation.

To close this entry, I will leave you with a few photos of Hainan: WuZhiZhou Island, Nanshan, Tianya Rainforest Museum, BingLangGu

Sales Psychology

2010-03-08T14:03:00Z

March 8 is International Women's Day in China and many other countries around the world. Walking around local stores for women's clothing, signs showing "3.8 discount" representing the date 3/8 were everywhere. In China (and Chinatowns across the world), discounts are not calculated as how much off but the ending price percentage X 10. So "3.8 discount" means 62% off.

Shops of course were busy with the big discounts but perhaps the discounts aren't as big as suggested. One store we walked by had a summer dress for 442rmb as the regular price and after 62% was 168rmb. Now 442rmb is definitely beyond the price of the average Chinese worker who earns 2000rmb/mo. Even an middle class office worker earning 3000rmb/mo would think twice about 14% of their income on a single item of clothing. So in all likelihood, the sales clerks will start at 20% off just in case the customer is a naive overseas tourist but then go down to 40% to 50% off for locals. At 50% off, the price would be 221rmb which is still a very handsome amount -- none of my wife's friends here in China would consider buying a dress for that price. Even my wife, after reacquiring her local knowledge, would pass on it although $33 for a dress back in the USA would not have been out of the ordinary. It seems though at some number, the discount becomes too tempting and 3.8 looks to have triggered many to buy -- after all, 3/8 won't come again for another year.

Yuan to appreciate?

2010-03-08T01:30:00Z

After a few days rest from my vacation, I started reading up on the news again and my eyes immediately went to these articles:

China faces new pressure to let currency rise
Why China should let the yuan rise

At 5% appreciation, the RMB:USD rate would drop to 6:5:1. At 15%, it would drop to 5.95:1. While it wouldn't change my finances to any big degree, needing to spend another 5%-15% is still a bit painful. So to hedge against this eventual outcome (China's currency has no place to go but up), I will need to accelerate a few plans:

1) Repay loans to my father-in-law. When we came over to China, we brought some money over (10K USD undeclared per person through customs) but obviously not enough to buy both a home and an office. As we didn't know all the money transfer options yet, we ended up borrowing money from my mom (transfered via Western Union), wife's ex-business partner (Western Union also) and father-in-law. Since then, we've been repaying every month -- my mom and wife's ex-partner have both been fully repaid. Remaining is about 120K RMB to my father-in-law or about $17.6K at today's exchange rate. Since I'd much rather pay $17.6.K now versus say $18.5K later this year, I am consolidating a few Vanguard money market funds to write a big check to him asap.

2) Start moving money into CYB (WisdomTree China Yuan ETF). I've budgetted about $2000 USD per month for expenses so I will need to hold $48K in CYB per year I plan to stay during the near term.

3) Re-double efforts to start businesses to earn rmb to be spent here. After being in China for more than a year, I have a few ideas now so it's a matter of fully fleshing out the details and getting the funding together. (More on this in a future topic.)

ESOP fees

2010-02-26T17:48:00Z

A few weeks ago, I wrote about Employee Stock Ownership Plans (ESOPs) as a possible exit strategy for a privately held company. My company is in the initial stages of researching this option. To that end, I some researching and got several quotes from ESOP implementation specialists. For a company of our size, the quotes came out to about:

Setup
$5000 consultation and setup
$7500 legal
$15000 first year valuation

Annual
$5000 annual valuation
$2500 record-keeping
legal fees charged by hour

Compared to our Employee Fiduciary 401K plan, it is quite a bit more expensive. This means at the minimum, you need to have enough profit where the tax savings can override the annual fees. If we amortize the annual fees over 10 years, the cost appears to be about $13K/year. To get a baseline, we take the numbers from my previous ESOP article.

Option 1: Profits as Salary = -50K
Option 2: Profits as ESOP share purchase = -29K

For this simple scenario of distributing 100K in profits, we have a 21K tax savings by using an ESOP. However, the 13K/yr eats into it. Tax-adjusted, it's less than 13K but I don't want to re-do all the formulas so let's just keep the math simple at 21K-13K for 8K tax savings.

If this example company had very consistent earnings/profits, an ESOP might make sense at the 100K profit level. However, performance of most small businesses fluctuate with the economic cycles. In years where you have less than 75K in profits, all tax savings would be taken up completely by the ESOP costs. And in years where you have no profits or a loss, an ESOP would be an extra drag you don't need. For that example company, I would not feel comfortable starting an ESOP until annual profits on average were 200K with a range of 50K to 350K.

What my company has done is paid the initial 5K consulting fee and also a 5K pre-valuation fee. Even if we don't ultimately go down the ESOP road, the pre-valuation will at least give us a starting point number we can bring to potential investors interested in a buyout.

Vacation Plans

2010-02-25T12:40:00Z

In my last post about the plethora of languages in China, I ended with a mention of practicing Mandarin for my upcoming trip to Hainan. In addition, I want to travel to the following places during this coming year:

Beijing - Great Wall, Forbidden Palace, Tianamen Square, Summer Palace, Temple of Heaven, gardens and museums. I loved reading about archaeology and paleontology when I was younger and the shear history will be a transport to the past.

Yunnan - City of Eternal Spring, Lijang Old Town, Stone Forest. This area remains temperate all year so it will be nice vacation from the heat during the summer.

Chongqing to Wuhan - Yangtze river cruise from Chongqing to Wuhan through the Three Rivers Gorge Dam. Then the fastest train line in the world from Wuhan to Guangzhou.

Harbin - International Ice and Snow Festival. Might be too inconvenient to travel during the snowy winter though so I will have to ponder this option some more.

Day trips to Guangzhou, Zhuhai, Hong Kong and Macau. (The last 2 will be visa-dependent for my kids.)

It's a pretty ambitious vacation plan. Of course, I've taken roughly 6 weeks of vacation during the past 12 years of which 1 week each for my honeymoon and the birth of my 2 kids. Like I talked about in Sleeping in a Closet, starting a business often is a fight for survival and there may be no time for the luxuries in life.

Language skills for the 21st century

2010-02-24T18:07:00Z

Ask people for a generic skill to have to further job prospects and foreign language proficiency often comes up pretty high. And with more than a billion Chinese speakers and an economy growing in leaps-and-bounds, Chinese is right at the top of the list. But where as English spoken everywhere in the world is mutually understood, there are many Chinese languages that are mutually unintelligible. Even some dialects within the major languages are mutually unintelligible between each other. This map from Wikipedia shows the major languages, the number of speakers and where the languages are used.

The reason for the multitude of languages is history. China's history spans 4000 years to the Xia Dynasty in 2100BC and languages fracture with time and distance. Over the course of history, the regions that make up modern-day China often were conquered and united -- and then fractured when dynasties fell. And with each dynasty, a new prestige language would come into power. Only after the Communist takeover in 1950 did a sole language (Standard Mandarin) become required teaching in schools. (For map, the Mandarin listed is the overall Mandarin family -- not Standard Mandarin. Those who speak the Harbin dialect may not understand the Chongqing dialect.)

By comparison, English was solely concentrated in a small island country until the 1600s when European powers began colonizing the New World. 400 years of separation has led to different accents, different slang, different words but still a core language that is understood by everybody. (Late night shows periodically do skits with British people on who purposely use accents, slang, words not understood by Americans to great comedic affect.)

In the area of China I currently live in, three major languages can be commonly heard:

Taishanese - Cantonese Taishan Dialect is the language ordinarily spoken amongst the natives of this region. Amongst the locals, it is called "Toi San Wah" or "Hoi San Wah". (The neighboring city Kaiping speaks almost the same language except with a few words different. Hence, they might refer to their language was "Hoi Hen Wah".) Locals speaking to each other will always use this dialect or run the risk of "putting on airs" by using more "prestigious" dialects.

My parents are from Taishan and Kaiping respectively so they clearly can speak and understand the language. However, they never spoke it to us -- instead, they solely used Standard Cantonese so for the longest time, I always thought our relatives just had accents so strong where I couldn't understand what they were saying. It's only after marrying my wife that she properly instructed me on the nuances.

After hearing my wife use this dialect everyday (speaking to friends and relatives) for many years, I can now understand Taishanese to the extent of everyday life matters. My brain periodically has to do translations to Standard Cantonese -- for example, the word "to drink" is pronounced "yum" in Standard but "yim" in Taishanese. Hence, when I hear new words, I have to search my brain for words that sound similar and then pop in the context.

Standard Cantonese - Standard Cantonese "Baak Wah" is the preferred common language across the Guangdong province. Amongst the major cities in the Guangzhou, Hong Kong, Macau triangle, it is often the prestige language and also the native language. (For Hong Kong and Macau, it was the official language before the China handovers.)

In the Taishan area, most of the popular TV and radio programs are broadcasted in Standard Cantonese from either Hong Kong or Guangzhou. Hence, even if the locals here don't use it often in everyday life, they hear it hours everyday in the media. They may periodically use the Taishanese word instead betraying their background but in terms of communications, those who grew up in the Guangdong province since the rise of Hong Kong's media will have no problems using this dialect. (I visited Yangjiang just 2 hours away and could not understand a single thing they were saying when they used their own Cantonese dialect.)

This does lead to an interesting case where many older residents in the Chinatowns across the world only speak Taishanese. 75% of overseas Chinese in North America up until the late 20th century trace their origins to Taishan. So the older demographics who did not grow up with either Hong Kong media or Mandarin in schools cannot speak anything else.

Standard Mandarin - In the 17th century, the emporers began the process of making the Beijing Mandarin dialect the standard for communications amongst government officials. Standard Mandarin did not spread amongst the common people until the Communist Party took over in 1950 and made it mandatory in schools. Everything is taught solely in this language although before/after class, teachers and students will often use other languages.

Unfortunately, my Mandarin skills have not improved much since being here. Everybody I interact with speak either Standard Cantonese or Taishanese. The only people I come in contact with that don't speak one of the above two would be the young ladies who wash hair at hair salons. So I can semi-understand when somebody asks what kind of shampoo I want to use or whether my ears need washing -- a pretty limited scope. However, my son's everyday immersion seems to be working. He will randomly speak in Mandarin (and English and Taishanese) when playing so it's sinking in at some level.

The written languages makes the picture even more complex. Although spoken languages may be mutually unintelligible, literate speakers of these languages will understand common written languages. All speakers that see the symbol for "cup" will understand it only their brains will convert to either "bei" or "bui" or whatever is the pronunciation in their dialect. This even applies to works words that don't even sound the same. For example. the prefecture capital of this area is Jiangmen. The symbol for "jiang" is pronounced "jiang" in Standard Mandarin but Cantonese dialects might say "gong" or "kong".

But wait, notice I used the plural of "language"? There is Simplified Chinese, Traditional Chinese, Security/Banking Chinese and then various romanizations of Chinese of which Pinyin is the government standard. In everyday life, people use Simplified. Books, signs, advertising, arts might use Traditional. The banking sector uses their own variation on Traditional to reduce errors on documents. Finally, Pinyin is used by anybody who types Chinese in a computer as the typical interface has a user entering the romanization to display a list of characters to choose.

If I have scared anybody off with the gory details of the Chinese languages, good. Remember, the fewer people who can bridge the gap between languages and cultures, the more opportunities there are for those who can. If I was not in China already, I might think about Chinese immersion schools for my kids where the first few grades are taught completely in Mandarin.

As a final side note, I will be in Hainan, the Hawaii of the Orient, for a 3 day vacation this weekend. According to the map, the local language is a Min dialect -- some variant of Min is also spoken in Taiwan. Obviously, my Cantonese knowledge won't help much so we'll be fully dependent on my wife's Mandarin. However, I just paid $4.99 for iPhone Odyssey Mandarin Pro to have at least the basics in my pocket.

Expectations versus reality

2010-02-23T17:04:00Z

In my last entry, I wrote about the expected returns for my portfolio. How has it played out during my limited investing career?

Annualized Returns

After pulling my numbers together, I have:

                    Nominal        Real
            CPI      Return      Return
---------------------------------------
1996      2.93%      22.70%      19.77%
1997      2.34%      16.80%      14.46%
1998      1.55%      14.90%      13.35%
1999      2.19%      20.70%      18.51%
2000      3.38%      -1.30%      -4.68%
2001      2.83%      -4.80%      -7.63%
2002      1.59%     -19.80%     -21.39%
2003      2.27%      27.10%      24.83%
2004      2.68%       9.80%       7.12%
2005      3.39%       6.70%       3.31%
2006      3.24%      16.90%      13.66%
2007      2.85%       4.00%       1.15%
2008      3.86%     -17.50%     -21.36%
2009      2.49%      16.10%      13.61%
---------------------------------------
          2.68%       7.05%       4.32%

At 7.05% nominal and 4.32% real, I appear to be on track. Considering all the articles about the "lost decade" of investing, I'm not too unhappy with my returns. Like the over-used sports cliche, it is what it is.

Dollar Returns

Unfortunately, since I am in the portfolio build-up phase, the great returns of 1996 to 1999 only worked on a small amount of money. The following is a graph of my dollar returns and it looks far different from the pure annualized numbers.

The numbers look pretty exciting during 2008 and 2009 as the amplitude is 3.5-4 times larger than any other movement in the previous 12 years. Without any further context, the first reaction would be "heart attack".

Contributions

After stacking on my contributions, the graph changes dramatically.

The above picture explains why I will probably be able to retire on a 0% real return. My savings rate simply overwhelms the market gains/losses. Even in the turbulent 2008 (up to March 2009) when the most equity markets dropped 50%, my net worth went up anyways. Combined with the 2009 rebound, the line seems to go up a cliff.

Near Future Projections

With the market position of my company, I'm confident I can keep my savings rate high for the next 10 years. I doubt I will stay in China forever so if I factor the extra increase in living expenses, the coming 2 decades might look like so:

The above picture tells me if I keep my my savings rate up, what the market does will not materially affect me for another 10 years or longer. Sometime in the mid 2020's is when market gains might become a significant part of my net worth.

Business Equity

All the above graphs though only show my liquid/semi-liquid portfolio. If I added my business equity using the conservative formula of 1X annual sales, the picture changes even more.

The estimate of my business equity appear twice the size of my investment contributions. By comparison, the green sliver representing market returns now look like statistical noise. What this picture tells me is to concentrate on my business ventures. Passive investments work nicely to produce income for retirement but during the prime of a working career, improving attitude, ideas, skills, experience, network, etc. to reach for the brass ring seem far more important.

Far Future Projections

In my last entry, I mentioned my goals for the future is to save enough where I spend just my contributions in retirement and leave any returns for my heirs. The following graph is a possible projection of this scenario. I've marked-to-market the orange area to 0 as exit strategies (cashing out) is often harder to building a successful business.

By comparison, the typical investing plan (for the minority who even makes such plans) is often the following. Save 10% of your salary for 40 years in a target retirement fund that becomes more conservative over time. Then the next 30 years, spend 4% of your portfolio until the money runs out at the end of your life.

I don't know whether I will achieve the goals I've outlined across various entries I've written -- after all, the future is unknown. However, making projections at least gives me a guideline to aim for and anything that improves my odds to reaching my goals, I'll take.

Expected real return

2010-02-19T00:01:00Z

In this thread at the Get Rich Slowly forum, a question was asked about everybody's expected rate of real (inflation-adjusted) return. My brain first started working on the answer like so:

6% stocks (5% overall, I overweight in risker equity allocations)
2% regular bonds
1.5% inflation protected bonds
1% commodities futures (insurance premium)
0% gold

With my target portfolio allocation:

60% stocks
20% regular bonds
10% inflation protected bonds
5% commodity futures
5% gold

This would calculate out to:

6 * 0.60 + 2 * 0.20 + 1.5 * 0.10 + 1 * 0.05 + 0 * 0.05 = 4.2%

Add in 0.25% for rebalancing bonus and I have an answer of 4.45%

But this got me thinking a bit. How much return do I actually need? After all, my parents are retired very comfortably on 0% real return on their portfolio. The vast majority of their investments was in rental income (they have yet to sell anything so no bubble inflated housing capital gains to artificially bump this number up) and CDs -- both of which peg the rate of inflation after taxes.

How did they do it? Well they came to the United States in their late 30's and early 40's. Once here, they studied English well enough to get white collar jobs -- however, these jobs never paid more than lower middle class wages. What they did have was typical immigrant frugal lifestyle. They saved 40% of their income without fail. Of course, this meant the life for us kids was very spartan. I don't recall any Christmas or Birthday presents -- I remember one year where we had cake and a party for a birthday. Eating out was reserved for Chinese New Year. Vacations? Are you kidding me?

But back to my parents ... let's go through the math on such a scenario. Since we are talking real returns, we can throw out inflation and stick with the same wage through the working career.

Median household income: $50K
Taxes: $5K (married couple w/ kids don't pay much at lower income levels)
Spending: $25K
Savings: $20K

So after 30 years of working, this theoretical couple would save up $600K in some combination of housing equity, rental property and cash. The math here is pretty simple -- divide total portfolio by annual expenses to get the number of years the money would last -- or 24 years in this case. Now let's say Social Security will still be around but paying less so this couple would draw $1250/mo in benefits. That reduces the annual "portfolio" withdrawal to $10K allowing the savings to last 60 years. Since it's unlikely to live until 120-130, they could increase their retirement spending by 40% (to $35K) and the nest-egg would still last 30 years.

As for myself, I may have gotten the best of both worlds. I emigrated to the United States very early in my life so I got all the opportunities but was able to build a base on my parents' money management habits. I make far more money than they did as I run a technology company but I also pay way more in taxes which makes it quite satisfying that I can exceed their savings rate.

Since I will probably be able to retire on 0% return given my extreme savings rate, why I don't I just stick with a lower volatility portfolio then? Unfortunately, my goals are different from my parents'. I have no idea whether I can pass on my money management skills to my offspring and knowing that the majority of inherited money is spent away after 2 or 3 generations, I have to shoot far higher. I either need to build up a portfolio in the tens of millions or build up businesses my kids can learn fiscal skills in (or hopefully do both).

For this reason, reading about my investing ideas is good but copying them might not since my goals are different from most people's. The entire range of real returns whether 0% or 5% will work out just fine for my personal retirement target. For this reason, my portfolio plan has an increased bond/commodity allocations with riskier equities to counterweight. The idea there is I will have the same expected return with a lower volatility. The side effect is the results set now includes the possibility of under-performing (and out-performing) a traditional portfolio. Under-performance would only affect the type of inheritance I would leave behind and at the moment, I still have conflicted philosophies on the strategy.

Work Overdrive Trivia

2010-02-15T05:26:00Z

The last 4 days, I have been working in overdrive. We have a "product" demo this coming Wednesday where knocking their socks off is important. We've previously demo'd this product to other customers but in those cases, we had the sense that (1) we were the only vendor being considered and (2) implementation schedule was further in the future. So those demos were just ugly hacks using existing features. This time, there's competition so I totally rewrote the underlying architecture and implemented the theoretical features to produce a polished product ready to turn on.

Working remotely overseas during these periods have its pluses and minuses. On the upside, I was extremely productive being able to work with the regular office interruptions. In addition, working at off hours meant I had the development resources all to myself for testing. On the downside, not overhearing the office discussions meant other developers started down a different direction than mine and there was some wheel spinning to get re-oriented.

Meanwhile, Chinese New Year festivities were starting in full force. During holidays, just normal crowds in China come out in huge numbers. In the United States, the only analog would be Black Friday shopping. (The two photos are of the local pedestrian shopping district and a temporary flower plaza.) But unlike Black Friday where lower prices stoke demand, the demand in China goes up first and then prices follow. Restaurants will not only stop accepting their VIP discount cards (if they have them) during this period but even add a surcharge on menu items. The local hair salon I usually get a haircut at doubled their price from 30 rmb to 60 rmb during the final few days.

Fresh fish in this area is usually very cheap but once in a while, i have get a hankering for non-local fish. So yesterday, I went to the biggest supermarket in town (Vanguard Shop) and bought frozen salmon. Sure, it's not as good as fresh salmon but beggars can't be choosers. Pricing in this part of China (perhaps all of China?) is done in rmb per 1/2 kg (pronounced "gun" in Cantonese). So at 59 rmb per gun, that comes out to $7.85/lb. A nice premium over the $5.99/lb for fresh salmon steaks I used to pay in San Francisco.

Employee Stock Ownership Plan (ESOP)

2010-02-11T11:48:00Z

As a small company with continual day-to-day involvement from the founders, exit strategies are hard to come by. Finding a buyer willing to pay a large amount of money upfront for an operation that might stop being profitable after management change is a major barrier to overcome. For a company that is profitable, one possibility is to incrementally sell shares to employees under a Employee Stock Ownership Plan (ESOP).

There are many types of stock incentive plans -- for example, stock options and stock purchase plans. However, the acronym ESOP refers to a very specific type of plan. It is an ERISA-qualified plan (ie, retirement plan) where the employer contributes either stock or cash to the accounts of all eligible employees using a "fair" formula (percentage of salary is most commonly used). Stock to be contributed can be purchased from existing shareholders or created from new shares. In return, the employer can then take a deduction equal to the value of the contributed shares. In effect, the IRS buys the shares (via tax deductions) and gives those shares to the employees.

Let's go through some simple examples to understand how this might work:

Option 1: Distribute profits as salary

100K in taxable profits (C Corporation)
100K in debt at 10% interest (personally guaranteed)
40% personal income fed+state tax rate

10K interest, ending balance 110K
60K after-tax profits

Net Balance Sheet: 60K - 110K = -50K

Option 2: Repay debt using profits

100K in taxable profits (C Corporation)
100K in debt at 10% interest (personally guaranteed)
40% corporation income fed+state tax rate

40K taxes, 60K after-tax corporate profits
60K debt paid, 4K interest on 40K remainder, ending balance 44K

Net Balance Sheet: 0 - 44K = -44K

Option 3: ESOP share purchase

100K in taxable profits (C Corporation)
100K in debt at 10% interest (personally guaranteed)
10% owners percentage of payroll
40% personal income fed+state tax rate
25% personal capital gains fed+state tax rate

10K interest, ending balance 110K
75K after-tax capital gains
10K ESOP contribution / 6K after income tax

Net Balance Sheet: 81K - 110K = -29K

Option 4: Repay debts using ESOP share creation

100K in taxable profits (C Corporation)
100K in debt at 10% interest (personally guaranteed)
10% owners percentage of payroll
40% personal income fed+state tax rate

100K debt paid off, ending balance 0K
10K ESOP contribution / 6K after income tax

Net Balance Sheet: 6K - 0K = 6K

So we see in this scenario where a corporation is carrying debt, using an ESOP as the vehicle to distribute profits makes a big difference. Now the possibilities can get far more complex. For example:

100% ESOP-owned S-Corporations pay no taxes
Dividends paid to ESOPs are not taxed
ESOPs can borrow money to do a leveraged buyout of original share holders
If an ESOP owns at least 30% of a company, capital gains on shares purchased can be deferred if the money is used to purchase other equities
Cash can be contributed and invested in traditional investments to fund future ESOP share redemptions

The tax numbers sound really nice but there are complications:

ESOPs are complex beasts and are expensive. There is nothing like Employee Fiduciary for ESOPs. Set-up costs might be $25K+ with annual fees starting at $7K+.
All transactions require official share price valuation by a 3rd party. This is an expensive endeavor and hence usually limits any transactions to once a year.
A lot of effort is needed on the part of management to produce the data and projections needed for valuations.
The culture of the company might be changed where too many Indians think they are Chiefs because they own 0.1% of the company via their ESOP account.

At this point, my company is exploring the ESOP possibility. We're in the process of a preliminary valuation of our company as a first step but whether we go this route in the end, I do not know yet. For more reading, National Center for Employee Ownership's website has a wealth of information.

Valentine's Day

2010-02-10T15:18:00Z

Anybody in a consumption-oriented society knows Valentine's day is coming up on February 14. The stores have been packed with V-Day decorations and advertising is everywhere to buy diamonds, chocolates, handbags, etc. for the love of your life. So in honor of this upcoming Hallmark holiday, my Saint Valentine-related musings.

While chatting online, somebody made the following comment:

I wish I was a brave as [xyz] ... she's leaving for Japan to start a new life and career ...

I mulled that over some and realized perhaps it's not courage but different values in life. In my case, the pull of relationships just is not that strong. Whether through nature or nurture (or both), my brain has been conditioned to react to accomplishments. Give me projects to work on -- whether personal or business (and these days, business projects are personal projects) -- and I am happy as a clam. But this means is there are few ties that bind. Location? Don't care. Friends? I recycle new sets of friends all the time and leave my previous crowd behind. Coworkers? Haven't kept contact with anybody from previous jobs. Family? Not very close to parents or siblings. In short, there is little holding me back from new ventures or new locations.

There is a downside of course. Lack of deep relationships, lack of networking means you have to depend on yourself so much more. It's a tougher road but in the right circumstances offers a higher financial upside. In my last entry Sleeping in a closet, I wrote about ... well ... sleeping in a closet at my office during the initial days. Unfortunately, none of my relationships with the opposite sex -- from serious to casual -- survived this period. Once in a blue moon, I wonder if the course of events could have played out differently but the moments of introspection don't last long as I know those pairings would not have lasted over the long term.

Maybe there is an alternate reality where I am great at socializing, networking, emotional support and perfectly happy with fewer/lesser accomplishments but more/deeper relationships. After all, the differences in classes in developed countries is rather minor compared to say being born in Haiti so would I really suffer if I lived an average suburban life? But on this earth, I am a hard-driving Type A personality. Fortunately, I am now married to someone who perfectly complements my disposition and we have 2 wonderful kids together.

Sleeping in a closet

2010-02-09T21:56:00Z

There's a common saying -- it's the journey and not the destination. Sometimes arriving at your destination too fast can be a detriment as you might end up losing out on the opportunity to practice the necessary habits and skills for a successful long run. We've all seen in the news (and perhaps even seen in person) about sports stars having nothing after their playing career is done or lottery winners being bankrupt within 10 years or 20-year old dotcom millionaires going bust.

I remember my brother's ex-girlfriend having very naive ideas of business and the working world. Her family owned several apartment buildings in San Francisco -- an empire built before she was born -- so she grew up with the proverbial silver spoon in her mouth. She once had me review a business plan she was putting together and I was surprised at the time on how simplistic it was. She just skipped far too many beginning steps -- the starting steps that required a ton of hard work.

I see something similar with my my brother-in-law here in China. His first job out of school was simply too good. He was able to leverage that job into earning income 3 or 4 times more than the average worker which is typically in the province of doctors or IT specialists or businessmen. Unfortunately, nothing lasts forever so when that job ended, he only could find average jobs afterwards. He went from idealistic and earnest to grumpy and pessimistic. He continually dreams of running a business but is not willing to start on the beginning. Over the years, we've made offers for seed money to start small but for him to sacrifice so much effort and perhaps not even get the same salary he made in his first job is very deflating mentally.

There's still value in "paying your dues". Not so much in the original sense of learning a company from the ground up and working your way up the ranks -- that kind of career is in the dustbins of history. Instead, paying dues is a personal journey. I started writing computer programs at the age of 15. Before getting my computer science degree, I was paid minimum wage to develop complex and often critical software for local companies. Next, I spent years wearing a suit and tie in a cubicle maintaining software for a boring insurance company. Finally, while my peers were earning 200K+ salaries at the latest dotcom craze, I worked 12 hours a day on our business venture while sleeping in a walk-in closet at my office. When the phone rang from our east coast customers, I'd jump out of my sleeping bag and answer the calls as if we had non-stop support. So when I get my monthly (now stable) paycheck, I don't see the consumer goods it can buy. Instead, I see the years of hard work to get to this point.

Part 2 and more to come ...

Money for chores

2010-02-08T12:49:00Z

My two kids are age 2 and 4. Tonight, to have some fun, I cut up some paper and draw some money symbols on them so they could pretend they had money. They immediately started cleaning up to say they were "doing work" and "earning money". And they cleaned up far better than they've ever done even pushing the sofa away to get the toys sitting underneath.

There's probably a topic here about raising kids and motivation. How it goes yet, I do not know -- I have stats on class mobility and a germ of an idea but where the direction goes is to be decided.

Housing in China

2010-02-07T07:19:00Z

House Hunting

After arriving in China, we spent the first week holed up in my brother-in-law's condo. A lot of time was spent sleeping trying to adjust to the jet lag and time zone differences. In addition, the Chinese people were gripped in the fear of the H1N1 virus at that time so everybody was scared to meet up with anybody who just arrived from the United States.

After our self-quarantine was over though, our top priority was finding a place to live. Our first option was to rent a fairly new unit in a gated community. Unfortunately, Taishan does not have many expats that were not previously Chinese nationals -- I've seen just a few westerners around here who seem not to be just tourists. By comparison, more cosmopolitan cities like Guangzhou or Shanghai has plenty rental stock available for foreigners. Hence, we switched our focus from renting to buying.

In the cities of modern China, here's how housing might be roughly categorized:

Old houses

Cities in China are intermixed with old and new structures. If you see old houses like these in cities, it in all likelihood used to be farm area. Concrete and urbanization sprung up all around them with the farm land perhaps sold for factories, high rises or shopping malls but still leaving the houses standing. In Chinese custom, the ancestral home is the village "herng ha" origin point so even those families that move up in society into better lifestyles will keep their old village houses to make annual offerings. (My dad's ancestral home has sat empty for 40 years or more.) Sometimes the family might opt to knock down their ancestral home and build a new one in it's place. As such, these properties are rarely for sale.

Old multi-stories

In pre-modern China, 2/3/4-story buildings were the dominant style in urban cities. The ground level was for shops with the other levels for living quarters. In today's China, these buildings are still common for shopping districts.The more famous pedestrian shopping districts will have buildings well maintained and the shop area remodelled like any western shopping mall. Older shopping neighborhoods might have remodelled shops but the living quarters will show their true age.

20+ year old condo buildings

As China began their move to capitalism, workers began migrating from farms to cities. In response, multi-story condos and apartment buildings sprang up. They look very aged for two reasons: (1) Southeast China is a tropical monsoon region and the wet weather is rough on building materials. (2) No HOAs -- nobody maintains the exterior of buildings whether cleaning or repainting. Inside though, the units might be newly remodelled and rather comfortable.

10 year old condo buildings

Buildings in the last 10 years have started using measures to be more resistant to the weather. For example, instead of just concrete exteriors, tile is layered over. And in place of metal/wood doors/window bars, stainless steel is used. The interiors will usually be marble tiles wall-to-wall.

New condo buildings

The latest residential buildings have more varying styles and colors. However, they still have same basic idea -- tile and stainless steel. The ground level is almost always reserved for shops.

New condo buildings with elevators

By law, any new building that is 11 stories or taller must have elevators. In smaller cities, this requirement usually limit the skyline. (It's still pretty tiring to walk up 10 stories.) In larger cities though, the new residential buildings tower into the sky 20/30/40 levels up.

New condos in gated communities

The latest housing demand is for gated communities with HOAs maintaining the buildings and providing security for the area. With security, unit owners are able to have have open decks. By comparison, regular buildings always almost have their decks fully enclosed with steel bars. Also common in gated communities are gardens, exercise equipment and play areas for kids. All-in-all, a much nicer environment if your point of comparison is to an urbanized western city.

Elevator buildings in gated communities

The next level up is a high floor with a view in a building with an elevator. For a regular building, walking 10+ stories or more is not considered an advantage. Hence, the top levels sell at a big discount. But if you have an elevator, then the penthouse with a rooftop garden or patio is very desirable.

Rowhouses in gated communities

This housing is reserved for the top businessmen in China. These will start at near 1M rmb in cheaper cities and go up to many million rmb in areas with higher costs of living. Even today's relatively easy mortgage terms in China still require 25%-35% down payment minimum so only the top echelon in China will live here.

Standalone houses/villas in gated communities

Next step up with no shared walls. In the communities I've visited, lush gardens often surround the house with ponds willed with expensive koi fish.

Housing Prices

Like every where else, prices vary depending on location, quality of neighborhood and unit level. For example, the 3rd and 4th floors are most desirable in a regular building. But in an elevator building, the top floor is. And obviously, places with more economic or political activity will cost more. In China, pricing is always given as RMB per PING FONG (square meter) -- I know the rough prices in Taishan so I will give that as a baseline.

20+ year old condo             1000 rmb/pf
10 year old condo              1500 rmb/pf
New condo                      1750 rmb/pf
New condo w/ elevator          2000 rmb/pf
  * only exists in larger cities
Gated community condo          2000 rmb/pf
Gated community condo w/ elev  2500 rmb/pf
Rowhouse                       3000 rmb/pf
Detached house                 3500 rmb/pf

The prices do not included build-out or remodelling. Expect 750 rmb/sf for standard finishing (marble tile floors, stainless stear exteriors, modern bathroom). The cost can go up to 2000 rmb/sf if you want the top quality finishes.

When looking at pricing by size, it doesn't seem like a rowhouse or detached house is that much more expensive than a condo . However, condos typically are 75pf to 150pf (800sf to 1600sf). By comparison, rowhouses/detached houses are 300pf to 500pf (3200sf to 5400sf). So a large condo with elevator might cost 375,000 rmb while the smallest rowhouse would be 900,000 rmb.

Taishan is a city of 300K in a county area of 1M people. There are many cities with much more population and economic activity. My general idea of pricing from overhearing others talk about housing prices in other cities:

Kaiping (600K neighbor city)     X 1.5
Jiangmen (prefecture capitol)    X 2
Zhuhai (Macau border)            X 3
Guangzhou (province capitol)     X 4
Shenzen (Hong Kong border)       X 4
Shanghai (province capitol)      X 5
Beijing (country capitol)        X 6

Our Final Decision

After looking at condos and houses for 3 weeks, we found seemingly the perfect place (sum soi, translation: heart's water). 142.5pf (1534sf), very wide open views from the decks, gated community with security, exercise areas and playground structures and best of all -- a second smaller unit available in the same complex we could use as an office. We called up some contacts and were able to negotiate the price down to 2750 rmb/sf for a 3rd story unit already remodelled and ready for move in.

Chinese New Year Lucky Money

2010-02-06T13:31:00Z

I previously wrote our Christmas spending was low but didn't think we'd get off so easy for Chinese New Year. Well that day is one week away now (February 14 for this year) so we've been busy getting ready. One of the tasks was stuffing money into red envelopes. By custom, those married give lucky money to the unmarried. However, married couples often elect to give to their parents also to "enjoy a nice meal" (rough translation). And those doing better can elect to give lucky money to younger siblings not as well established. Here is our lucky money budget for this year:

My parents                    $400
My wife's parents  2000 rmb ( $293)
My wife's brother  1000 rmb ( $147)
Close relatives
 100 rmb X 10      1000 rmb ( $147)
Close friends
 100 rmb X 10      1000 rmb ( $147)
Acquaintances
 20 rmb X 25        500 rmb (  $73)
-----------------------------------
TOTAL                        $1206

Back in the U.S., we typically might give away $600 but receive back $500 for our kids. Many friends with the same number of kids will simply give back the same amount they received. But here in China -- as the "rich foreigners", we probably will get back 10 RMB for each 100 RMB we give away. At that ratio, this Chinese New Year will cost us about $1000. For this reason, many Chinese immigrants will not return to China for a visit/vacation until they save up enough money to pass out as presents. (Or they return to China and hide away from friends.)